What's a Home Equity Line of Credit (HELOC) and When Should You Use One?

It takes time to buy a home and then enhance its equity. You aren’t building equity or the value of the house to sell it later because you are living in it. But there may come a time when you need financial support to manage the expenses in your life.

There are several options, such as a home equity line of credit or HELOC, to support expenses like house renovation, paying for education, or buying a car. Even though it's a great loan type and has lower interest rates and excellent conditions, there are certain drawbacks. Let's discuss when you should and shouldn’t use HELOC.

What is HELOC?

A home equity line of credit, or HELOC, is the amount you can borrow from different lenders against the equity. You have built this equity since you bought your house. A simple rule of calculation for a home equity loan or HELOC is subtracting the mortgage you owe from your home’s worth at that month. So the more mortgage you pay, the higher the value of your house. Furthermore, the more investment property equity line of credit you can borrow.

You can borrow this amount of money over an extended period based on your needs. This is paying off the same as other mortgage loans.

Prime Reasons to Take Out HELOC

Following are some typical needs to take out HELOC, such as using HELOC to pay down mortgage.

• Making home improvements, whether they are minute or significant
• Paying for your or your kids’ education.
• Minimizing your other debt or mortgage
• Paying for travel
• Emergencies

One of the primary purposes of a HELOC Loan is that the loan you get is against the equity. This purpose makes it easier to get. Furthermore, it has lower interest rates or stricter conditions. It may even be tax deductible. Hence, you can use a home equity line of credit when you what you are doing, and you can quickly pay it off.

Home Equity Line of Credit Vs. Home Equity Loan

Typically, an investment property equity line of credit is similar to a credit card in that you take some loan and pay it off. The more you pay off, the more you can take again, but always against the equity of the home you have built up.

On the other hand, the loan you take against home equity is categorized as a Term Loan, which, like other loans, is borrowed as a lump sum amount. Furthermore, it has a fixed interest rate and duration to pay it off.

When You Should Use Home Equity Line of Credit

You should take a loan when you need it, but there is a fine line of difference between needs and wants. Because even though there are better terms and rates for a home equity line of credit, it is still against your equity. You are at risk of losing your home in case of non-payment compared to credit cards, where your only damage is to your credit history and profile.

Nonetheless, here are some great reasons to take out a loan from HELOC.

Home Improvement

If you want to make your home life comfortable, enhance the value of your property, and love upgrading it, HELOC is the better option. Upgrading your home may be due to adding additional amenities, changes because of newborn babies and kids growing up, etc.

It also adds value back to your home, allowing you to take more loans and get tax rebates. You should be careful of the amount you take as it added to the mortgage can rattle your monthly finances and budgeting.

Consolidating Your Other Debts

You can use the HELOC to pay off high-interest rate loans easily due to it being lower rates and always against your equity. Furthermore, you can distribute the HELOC repayment over a longer duration, marking less load on your monthly budgeting.

Always know the risks before swapping and paying off debts.

Paying for Emergency

While it is most important to save some money for a rainy day, if you haven’t saved enough, HELOC is a good support in case of emergency. You should always consider how you will pay it off if you are using it for an emergency. Nonetheless, even if you have the option, we still recommend investing in emergency funds for this particular reason.

When You Should Not Use home equity line of credit

We have already mentioned that you are at risk of losing your house if you are unable to pay for the home equity line of credit loan you took. So be cautious in using which loans for what expenses, such as HELOC to pay down mortgage. Here are some of these non-HELOC reasons.

Paying for Vacation

home equity line of credit isn’t for leisure activities due to the risks. This shows that you aren’t responsible for your money. So consider the risks, HELOC rates, increase in prime rate, etc., before using a home equity line of credit for such activities.

Buying a Car

There isn’t much difference between the car rates that you get now when compared with HELOC. Also, car loans are secured against your car and not your home, so avoid the risk.

Unlike your home, cars are depreciating with time while your home is increasing in equity and market value.

Consolidating Your Debt

We have already mentioned this reason above for taking a loan from HELOC, but we also advise against it. Primarily, the reason behind it is while paying off high-interest loans is always best, you should review which factors drove you to those rates. If you think they weren’t required, you shouldn’t take HELOC as a support. First, remove those drivers and then consider investing.

Conclusion

In the end, it is all about how responsible you are with your money and whether you can balance the risks involved and the benefits you get out of HELOC.